Bangladesh: As good as it looks on paper?

In this superb piece, Lucy Stevenson, a student from Greenhead College explores growth and development progress in Bangladesh. Highly recommended for all A2 and AS macro students.

In a corner of South East Asia, a country once known as a ‘basket case’ due to its dependence on foreign aid and predicted struggle post-independence, is showing signs of strength despite the global downturn in the economy. With people crammed onto flood plains that are regularly swept by cyclones, Bangladesh hardly has the natural benefit of resources that many developing economies are armed with. However, this country formerly known as ‘the test case of development’ has shown that despite famines, military coups and catastrophic floods, it is possible to drastically improve the lives of the poorest without hanging around in wait of economic growth.

If you follow the definition of economic development as the process of improving peoples economic well being and quality of life, then you would struggle to dispute that Bangladesh has developed tremendously since it was granted independence from Pakistan. The state’s ability to maintain a consensus in favour of basic social spending has resulted in an extraordinary improvement in human welfare, with citizens of Bangladesh now predicted to live four years longer than Indians, despite being half as rich. With a government that spends more than most low-income countries on helping the poor, 12% of state expenditure is placed on social-safety nets such as direct feeding programmes, drastically improving living standards.

Bangladesh also remains proof that taking the role of women seriously in a developing state may have a positive multiplier effect in human welfare. Although Bangladesh was granted independence at a time of harsh population control policies such as China’s one-child, the country’s choice to opt for a programme of voluntary family planning has had staggering effects. The results, a fertility rate halved within a generation and women using contraception rising from 8% in 1975 to over 60% today, has allowed for the creation of a ‘demographic dividend’. With the number of people entering adulthood exceeding those being born, the country has increased the size of the labour force effectively whilst keeping the size of the population under control.

It also must be put forward that family planning has drastically improved the economic role of women. The increased influence of women in the household, who could now control their family size, allowed mothers to go out to work once the textiles industry took off, increasing household disposable income, consumer confidence and in the long run, expenditure. With 90% of girls enrolled in primary school in 2005, twice the enrolment rate of 2000, Bangladesh seem on track to increasing the size and capabilities of their labour force through taking women seriously as a key agent for development. Child welfare has also been on the rise, with the introduction of micro-credit loans to struggling mothers allowing expenditure on children’s food, health, and education.

The economic empowerment of women has played a key role in the development of an industry which is currently allowing Bangladesh to weather the global economic storm. Bangladesh’s textile industry is the 2nd largest exporter in the world, accounting for 80% of national exports and employing 3.5 million workers, over 80% of them women. With garment sector export growth standing at an impressive 20% annually, Bangladesh’s current account has yet to suffer from the recessions of the US and the Eurozone, it’s two key markets. Although this may seem hard to comprehend with the current struggles on the British highs street, due to the clothing factories producing goods that are supplied to cheap retailers such as Primark and H&M, the industry has not suffered a fall in demand as UK consumers begin to search for lower priced garments.

Transformations in the agricultural sector have greatly influenced development across Bangladesh, helping to reduce the persistent rural poverty that was once a characteristic of the nation. Despite once being doomed as overly dependent on food aid, the country is now a small exporter of rice. With the introduction of ‘boro’ rice, which is harvested and planted in winter, farmers now have the ability to increase their productivity to two harvests a year, greatly reducing the risk of external shocks on the economic and social livelihoods of those employed within the sector.

This increased productivity has reduced the risk of households suddenly being subjected to extreme poverty, shown through 2007-2012, where three global food price spikes and two cyclones did not result in the expected spike in poverty. Better flood control and a more efficient use of fertilizers have steadily increased food grain productivity further, increasing the economic stability of the market and therefore holding out hope for opening up further export markets in the future.

The role of non-governmental organisations has been key in the economic development of Bangladesh, and there is no argument that the state could have increased human welfare to this extent alone. The government have jointly-run health programmes such as inoculating every citizen against TB with BRAC, an NGO that had a significant influence on the lower child mortality rates with re-hydration advice for mothers and children. Not only have NGOs increased living standards, but Grameen Bank is a key example that they can go a step further, through increasing the stability and reliability of local finances. Their introduction of micro-credit loans to the poorest has helped local entrepreneurs gain the confidence to start up a business, encouraging enterprise and product innovation within local communities.

A major aspect of the development of Bangladesh has been the significance of a specific part of the current account: transfers. The remittance of wages home from the 6 million Bangladeshis that work abroad (mainly in the Middle East), is the 2nd largest component of national growth. In the year ending June 2012, a record $13 billion, 14% of the country’s national income, had been sent home to families in villages across Bangladesh. Following exports as the second highest revenue earner, remittances have seen a drastic increase, with August 2012 seeing transfers into the economy of $937 million, a record high that was up 30% on a year earlier. This remains proof to economists that the recession hasn’t hit Bangladeshi’s in the form of overseas work, with most in low-end labour jobs as opposed to the blue collar workers that have seen unemployment rise.

After successfully courting foreign investment in the manufacturing and energy sector, Bangladesh’s economy looks on the road to diversification from textiles alone. Alongside this, the country has recently secured a $987 million loan from the IMF in order to help overcome macro-economic problems and build a reliable reserve buffer. This is likely to further increase stability in the national economy on top of reduced inflation by 3% this year, encouraging more foreign direct investment in the future as it instils confidence. As global production shifts from West to East, low-cost manufacturing is driving growth for the country, with GDP predicted at 5.9% for 2012. This is only forecast to increase further as labour costs in China cause it to move into higher-margin activities such as product design and manufacturing multinationals remain on a search for low-production costs. Foreign aid has declined 10% over the last few months, proving Bangladesh is clearly becoming more self-reliant, shown through its foreign exchange reserves, which have reached $12 billion, enough to meet import costs of 5 months. This increase in reserves, due to a tight monetary policy from the central bank that disallows the import of unnecessary goods, has helped in the stabilisation of the macro-economic environment. With the currency appearing stable as opposed to the dips in the neighbouring rupee, property prices rising, and the car showrooms in Dhaka representing the emergence of an affluent middle class, it’s hard to dispute the figures that Bangladesh is the ‘only country in South Asia’ who has retained positive figures for all macro-economic indicators.

So what could possibly go wrong?

With the lowest labour costs in the world, with an income in textiles resting at $35 a month, it is often put forward that Bangladesh should be growing faster than China. So it begs the question, why isn’t it?
Although the textiles industry has taken off with great success, it remains true that 54% of the population is still employed in the agricultural sector, which may be a major employer but is struggling to meet the excessive demand for jobs.

The population pressure is showing also through the burden on the productive capacity of the industry, which creates a food deficit that causes ‘monga’, better known as seasonal hunger, throughout the nation. This creates an indicator that poverty is far from resolved in the country.

Meanwhile, on the streets of Bangladesh there have been violent protests by the women working in the garment factories that have allowed for the development of the economy. Poor working conditions and low-pay have forced the government to recognize the labour force’s needs and implement a minimum wage, highlighting the poor living standards beforehand. Although it may well be true that supplying low-cost high street stores such as Primark ensures constant demand, Bangladesh is still suffering from a plummet in disposable incomes throughout the West.

As the average propensity to save increases throughout the countries suffering financial crises, the price-advantage of Bangladeshi garments over other producers’ counts for next to nothing. On top of this, downward price pressure on garments globally means that red-tape such as final delivered costs must be cut in order for the country to remain competitive in world markets. With a significant amount of knitwear exported to the EU, it is arguably a volatile trading market to rely on. With ¾ of exports being made up of the textiles sector, it is risky for Bangladesh not to expand its export base and develop other industries that are only now beginning to emerge.

Infrastructure remains a key issue for this economy. It is impossible for Bangladesh to encourage foreign direct investment and job creation through the poor facilities available. As one of the ten largest cities in the world, Dhaka has the possibility to transform itself into a successful financial centre. Yet the issues of unreliable power supplies and poorly developed roads continue to put investors and multinationals off. This, alongside a financial system so feeble that analysts have claimed the banks are ‘among the weakest in emerging Asia’, is far from the strong framework Bangladesh needs to push on with development. It has become clear to many that too much development has taken place rurally, yet the urbanisation of Bangladesh in inevitable and higher government expenditure on improving basic infrastructure in cities is necessary. Foreign direct investment recently cashed in at a poor $1 billion a year, less than that of Albania and Belarus, one tenth of that of FDI in Thailand and Malaysia, and far less than what could be possible.

Although the focus of development has been on increased education and living standards, it appears that this may be deceptive. Although the enrolment rates have remained high at schools, research has proven that the quality of education remains poor. The government spend below average for low-income countries on public goods, with only 2.2% of GDP invested in education and 3.5% in health. Drop-out rates remain extremely high, with only 60% of children completing primary school and a small 25% of 11 year olds passing tests that place them at the correct standard for writing and numeracy. This presents worrying prospects for the future skills of the labour force. This lack of government expenditure proves that if GDP growth rates had not been as sluggish as 2% a year up until the 1990s, then perhaps government spending on crucial public goods such as education would have helped this situation. With a poor quality of education available, it may suggest that the sheer number of young workers that immigrate to areas such as Kuala Lumpa for employment highlight an economic weakness, that they are unable to learn new skills for higher pay at home. The injection of transfers from these workers and their wages remain volatile revenue for Bangladesh to rely on, with Saudi Arabia, one of the biggest employers of Bangladeshis, hiring only a few thousand workers this year due to the downturn in the economy.

Therefore, although many view predicted GDP rates of 6.3% for 2012 as strong, Bangladesh is still lagging behind the South Asian growth average of 6.5%, with the balance of payments coming into strain as it saw an annual fall of $254 million, due to a sharp rise in petroleum imports to feed liquid fuel-based power plants. As exports saw a slight decline due to the recessions of the US and the Euro zone, it has become clear that export-reliant growth for this developing nation is risky to say the least.
With political corruption remaining at the centre of Bangladesh, as the Prime Minister recently started a dispute with the founder of Grameem Bank, an NGO which has significantly helped the development if the economy, it is clear why investors may think twice. It is often put forward that it is the pre-occupation with domestic political troubles that has caused the failure to follow through on structural adjustment policies that would have modernised the economic system and encouraged private enterprise and investment.

The future development of Bangladesh relies on a number of factors, one key issue relating to Chittagong Port. As the prime port of the country, which handles 80% of the imports and exports and is often described as the ‘lifeline of the Bangladeshi economy’, it is currently facing a possibility of modernisation. As many global consultancy firms such as McKinsey predict the country could double garment exports in the next ten years, the port is under pressure to upgrade and develop to meet this predicted demand. Installing modern equipment and applying good management would allow the port to reduce the turnaround for exporting ships, doubling the capacity it could handle. Located near Burma, China and India, it has the potential to become a regional business hub as it could lease port facilities to other countries. This would all result in a significant increase the trade surplus that has seen a recent decline, increasing economic growth and allowing the government to re-invest in public services to increase living standards.

Bangladesh should follow-through on a modernisation of the tax regime and a strengthening of public financial management, if they wish to increase the dwindling levels of foreign direct investment.
It is clear that the development of living standards in the country, although impressive in figures, is somewhat deceptive when the quality of public goods is investigated. Yet this is a country that almost every economist had bets on to fail post-independence, and has successfully developed the 2nd largest textile exporting industry in the global market, courted foreign investment and drastically improved the lives of the poor.

Bangladesh certainly has more to give in terms of real economic progress and stability, but will it let political corruption get in the way? The world can only wait.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for nearly thirty years. He has twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

Teaching & learning products

This resource comprises two practice exam papers (with supporting mark schemes) for each of the two Year 1 (AS) papers.
The format of each practice exam paper follows precisely the format of the specimen assessment materials issued by the board that have been accredited by Ofqual.